Steris's Tax Inversion Deal Highlights Appeal of Non-U.S. Address

The U.S. government’s attempt to prevent companies from seeking a tax address outside the country hasn’t stopped Steris Corp.

The Mentor, Ohio-based provider of hospital sterilization products and services announced Monday that it will buy the smaller Synergy Health Plc and establish the combined company’s tax address to the U.K., even as senior executives remain in the U.S.

Steris’s effective tax rate will reach 25 percent, potentially saving the company about $13 million a year, according to calculations based on the two companies’ annual reports.

“We’re not typically users of aggressive tax policies and I don’t think we are here,” Walter Rosebrough, chief executive officer of Steris, said on a conference call with analysts Monday. “So we’re not taking super-aggressive postures. We’re not using the number of techniques that the Treasury Department has described as things that they would naturally attack.”

The Steris-Synergy deal is the second announced since the Treasury Department last month detailed rules designed to make so-called inversions less attractive for companies. Those rules focused in part on pre-deal transactions used to make the U.S. company smaller and thus escape limits pegged to the relative sizes of the two companies.

The government has been trying to deter inversions, and the new rules already have had some effect. Since the Treasury Department’s announcement Sept. 22, Medtronic Inc. restructured its purchase of Covidien Plc with more expensive financing, and Salix Pharmaceuticals Ltd. and Auxilium Pharmaceuticals Inc. canceled planned inversions.

Second Set

Steris is moving ahead even as the Treasury Department contemplates a second set of rules that would limit companies from engaging in earnings stripping, a practice used by non-U.S.-based companies to load up U.S. operations with debt and effectively shift profits to countries with lower tax rates.

Congress, which could impose even more stringent rules, is deadlocked on the issue and isn’t scheduled to return to Washington until after the Nov. 4 election.

The first company to announce inversion plans since the Treasury Department’s rulemaking was Civeo Corp., a Houston- based owner of worker housing in Canada and Australia. The company said on Sept. 29 that it planned to change its tax address to Canada.

Eight Pending

Including Steris and Civeo, there are eight U.S. companies, with more than $200 billion in market value, that are working to complete inversions. Some 45 companies already have completed such reorganizations since 1982.

A U.K. home is attractive to companies for several reasons. The corporate tax rate there is 21 percent and scheduled to decline to 20 percent next year, compared with a 35 percent rate in the U.S. In addition, unlike the U.S., the U.K. doesn’t tax the profits companies earn outside the country.

The U.K. also offers favorable tax treatment of profits generated from patents.

Rosebrough said he and Richard Steeves, CEO of Swindon, U.K.-based Synergy, had been talking about working together for years. It was their advisers, Rosebrough said, who said they should structure the deal as an inversion.

Steris set aside about 32 percent of its pre-tax earnings to pay taxes over the three years ended in March, and Synergy set aside 21 percent. Because Steris is bigger, the companies’ combined effective tax rate was about 30 percent. Reducing that rate by 5 percent in the future would be worth about $13 million a year.